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In the last couple of weeks, I have had a number of conversations with friends in the industry about dissolving relationships with distributors in franchise states. As I have written about before, franchise laws can be extremely tricky. I have gone through a few instances of making changes in those states so here are a few quick tips I have to offer:

1. Although there are laws in many franchise states that allow wineries some recourse, and those laws may seem cut and dried to you, the state heavily favors the side of the distributor and nearly all lawsuits show this as precedence. Do you see provisions that state that if a distributor is a late or slow/no pay, they don’t adequately market wine, or they don’t buy wine at all, then that qualifies as “just cause” for a release? Sorry. It’s hard to win on this one.

2. If you can prove you have “just cause,” and your existing distributor agrees to a release, it’s common practice in many franchise states that in order to obtain a letter of release, you must buy out your franchise agreement. This means that the winery pays its old, under-performing distributor a year+ of gross or net profits. Even if the distributor still owes thousands of dollars!

3. How about waiting periods? In many franchise states, once a release letter is obtained, they still have 30, 60, 90+ days to sell their remaining product and the newly appointed distributor must sit on their hands and wait to sell your wines until that waiting period is up. Of course, the old distributor will offer a fire sale, which means that for months afterward, who will want to purchase them at regular wholesale prices? This can cause slow shipments, depletions and months of pain for a winery that has finally obtained a release, not to mention a frustrated and dejected newly appointed distributor sales force.

4. Have you considered lawsuits? Many distributors (particularly the big ones) in franchise states retain franchise attorneys to specifically go after wineries that have dropped them. Although you may eventually win the suit and be granted a release, consider that you may end up spending tens of thousands of dollars, and while the suit drags on, you will have months without your product being sold in that particular market. Also consider that your emails are NOT your personal property, so during a lawsuit, anything you have ever written to anyone in that franchise state becomes public record if it is included in the suit.

My biggest piece of advice: leaving distributors in franchise states is rarely easy and commonly very expensive. Do not consult other distributors in a franchise state for recommendations on what to do. Call up a qualified franchise attorney, spend the $2-5k it will likely cost to evaluate your position and possibly obtain a release letter, and do things the RIGHT WAY.

I have a lot to say about creating a well-oiled distributor network, but most of that can wait till later. However, if you are looking to be successful in your business, choosing the right distributor partners is crucial. There is a huge amount of research and skill that goes into setting up a lasting, mutually successful distributor network.

I think a lot of times, small winery sales people and owners are excited just to be adding more sales dollars and they don’t always think about the many factors that go into finding the right distributor fit, and as a result they end up stuck in relationships they can’t get out of, and lose out on potential sales.

One huge thing to consider before beginning selling wine in certain states is to determine whether or not it is a franchise state. Basically, if you sign up with a distributor in any states where franchise laws are in place, you cannot leave the distributor even if they don’t meet your standards for sales. As Barry Strike and John Hinman put it, “any state where a distributor can use state law (sometimes called a “franchise act,” sometimes called something else) to shield itself from the consequences of its own actions is considered to be a franchise state.”(“Franchise States: Dealing with Under-Performing Distributors.” Wine Business Monthly. Nov. 2002)

In some states, you cannot leave under any circumstances unless a distributor agrees to voluntarily release your brand. Laws by state vary, but generally speaking, the only time you can get out of working with a distributor is if they voluntarily release you, which to that I say, “fat chance.” Even if you have “good cause,” which is usually a provision written into many state franchise laws, most distributors will be unwilling to simply accept this. If you choose to move forward with the termination it can lead to costly litigation, and at the very least, a very unpleasant business relationship if the termination is not accepted.

In my experience, voluntary releases are few and far between. I do know there are some great companies out there that are extremely professional and recognize that sometimes, certain brands just aren’t a good fit. But for the most part, most distributors are very reluctant to release any winery. You would be taking dollars and business out of their pocket, which from their perspective is a very good reason not to release a brand.

Before you sign up with a new distributor, I highly encourage you to look into the state laws governing wine sales via distributors. If it’s a small market, it may not be worth the hassle of doing business there, and if it’s big, make sure you really do your homework. If any one thing doesn’t feel right about the fit, it’s probably best to wait until circumstances are better and you can find a company that fits your goals and plans for that market. Remember that working with distributors is a PARTNERSHIP, and particularly in franchise states, it is more like a marriage, where divorce is illegal and you’re there for better and for worse, till death do us part (hopefully it’s mostly the better part…)

One thing you can do to protect your business is to ask for a letter stating that, should you at any time wish to terminate the business relationship, the distributor will voluntarily release your brand. Many distributors are reluctant to do this but if it is a concern for you, it couldn’t hurt to ask.

Here are some of the franchise states that can create challenges for small wineries:

Virginia–this state has very tight franchise laws. It’s rare to get a voluntary release in this state under any circumstances, so I’d advise anyone looking to get into Virginia to choose carefully and wisely.

Ohio–there are some provisions for getting out of the franchise agreement (essentially you have to prove you have “good cause”), but it is by no means cut-and-dried. Be careful…

Georgia–If you want to switch in Georgia, you either must be released (probably ain’t happenin’), or you have to leave the state and sell NO wine for a number of years, which kind of defeats the purpose…

North Carolina–there is a case limit on this one; if you sell fewer than the state mandated amount (last I checked it was 2,000 cases) you can switch at will. After that, forget it.

New Jersey

Massachusetts–this is a little easier because even though it is a franchise state you can “dual,” meaning if you choose to terminate and the distributor does not accept, you can sell wine to two distributors. Be careful though–it’s a slippery slope and there are laws concerning how much you have to legally sell to the old distributor.

So what do you do if you are signed up with a distributor in a franchise state and they are underperforming?

If the distributor is underperforming but it’s not enough for “good cause” termination, you can create a new written agreement that outlines your goals and other considerations (eg. timely payment–a big issue for many wineries). Bear in mind you must make the goals reasonable! If a distributor refuses to sign on to a written agreement, it could potentially be used as grounds for termination. If they do agree, there’s a chance they turn their act around. At the very least it sets the stage for what can be considered “good cause,” and you have a clear plan going forward.